Schwartz on Oversight of Bond Indebtedness

STATEMENT
by Professor Emeritus Charles Schwartz of UC Berkeley
to the Regents’ Committee on Grounds and Buildings
meeting in San Francisco on January 19, 2010

This is a summary report on recent investigations that show serious lapses in the University’s fiduciary oversight of its bond indebtedness programs. It appears that this problem arises not just by accident, but from persistent and willful negligence on the part of high level officials.


All of the University’s external bond debt has been undergoing reorganization, since 2003, into two financing pools: One for all the Medical Centers and the other for all the campuses – that last is called the General Revenue pool. According to the latest Debt Capital Report, for Fiscal Year 2009, the outstanding debt for these two pools was:
$1.039 Billion for the Medical Center Pooled Revenue Bonds; and
$5.852 Billion for the General Revenue Bonds.

For the external parties, the Bond Market, the overall financial numbers are what count; and you see some of that data in the annual Debt Capital Report provided to The Regents. For the internal parties – all of us here inside the University – more specific data is required.

When each construction project comes before the Regents, first their Committee on Grounds and Buildings, there is specified a primary source of debt service, a particular revenue stream which takes on the responsibility of meeting all future obligations to pay back interest and principal. The main question here is: What mechanism is in place to monitor, to oversee, the ongoing performance of those arrangements?

For the UC Medical Centers one sees relevant data published not only in their annual financial reports but even in their Quarterly Status Reports. On the very first page of Key Indicators one finds: Debt Service Coverage Ratios, for Current Y-T-D and Prior Y-T-D for each one of the 5 Medical Centers. That is good and proper reporting, which comes to The Regents and to any interested member of the University or of the public.

THERE IS NO SUCH REPORTAGE FOR THE GENERAL REVENUE POOL.

This is a shocking situation. Let me tell you how I have come to discover this.

You may recall a series of articles posted by Professor Robert Meister, who made disquieting allegations about the pledge of student fee revenues in support of campus construction projects. My own investigations have been much more narrow, seeking to learn what oversight mechanisms are in place to monitor when some construction project might dip into student fee revenues in order to meet its debt service obligations under the General Revenue Pool.

There has been a series of letters between myself and Executive Vice President Peter Taylor, seeking to get that information. Finally, after several frustrating run-arounds, I have received a definitive reply. Here it is. (Email from UCOP Office of Public Information, January 13, 2010.)

“The University does not record individual tabulations of each project’s debt service coverage. This is because revenues generated by said projects are not the only revenues that can be pledged toward the projects and counted toward a debt service coverage calculation.”

That means that there is nobody minding the cash register of this candy store. More specifically, any time that a campus-based construction project runs short of revenue to meet its debt obligations, there might easily be a switch of funding to use student fees, without anyone knowing what has happened.

I have previously raised this question of the adequacy of regental oversight with the Committee on Audit. At that time we did not have definitive information about what UCOP does and doesn’t do. Now we have the answer; and it is not good.

You need to take corrective action.

If you have any questions about this, I will gladly respond.

Thank you.